Pub industry set for tough 2010

Fiona Bond
20.11.09 14:31

Things could turn sour for the UK's pub industry after it warned that it would come up against a tough trading environment next year, analysts said today.

Britain's leading breweries have all warned in their market updates this week that a rise in VAT, alcohol duty and possible interest rate hikes could send their profits tumbling.

The bleak outlook follows a flurry of financial results from the UK's leading breweries this week.

Enterprise Inns (ETI), which released its results on Tuesday, said it was bracing itself for a further decline in trading profit in 2010 after suffering significant losses in the year to September.

The pub group's pre-tax profits plunged from �263 million to 208 million, with revenues also down from �880 million to �811 million.

Enterprise Inns blamed depressed consumer spending and increased overhead costs for the lacklustre results. Chief executive Ted Tuppon saw little in the way of relief for the upcoming year, maintaining that the current economic climate would remain hard-hitting.

Analyst Sam Hart, of Charles Stanley, commented: "The outlook remains extremely challenging. The pub industry is governed by the consumer environment and with a VAT rise on the horizon, as well as an expected increase in interest rates, it will be tough.

"Pubs also face aggressive competition from supermarkets which are feeding into a drinking-at-home culture and offering prices below that of pubs."

Things were slightly more positive for the South East-focused pubs which managed to rake in profits, but they expressed caution nonetheless.

London-focused brewer Young & Co's (YNGA) midweek results revealed a 22% increase in half-year pre-tax profit to �11.46 million for the year to September, from �9.4 million in 2008. The company enjoyed a particularly robust first seven weeks of the second half, with managed house revenue up 0.9% on a like-for-like basis, after resisting temptation to introduce heavy discounting.

However, despite the strong set of results, Young's tipped trading conditions for the remainer of the financial year to be "undoubtedly challenging".

Sonia Kaur, analyst at Hardman and Co, believes that the results were more of a pleasant surprise that an indication of a strong trading year to come.

"The results were a nice surprise on the upside but the industry is by no means out of the woods yet. Despite the South East-focused brewers faring well during the first half, they remain cautious for the second half because of the cost pressures faced by the consumer.

"Those with the strong balance sheets have taken advantage of the weaker conditions by acquiring further pubs but of course they will have to deal with those costs during next year when consumer spending could be down."

Brewer Fuller, Smith and Turner (FSTA) was able to put in a sparkling performance in the six months to September, but also admitted that the second half of the financial year could be significantly tougher.

The brewer posted an 18% increased in pre-tax profits, which hit �14.1 million as a flurry of acquisitions, record low interest rates and pay freeze gave the company's coffers a firm boost.

Revenue rose by 10% to �116.9 million and managed pubs and hotel profit enjoyed a 20% rise, boosted by the 11 managed pubs Fuller's acquired in the last year.

Nevertheless, chairman Michael Turner said much of what had aided its profits during the first half would disappear in the second half, negatively impacting its position:"Our first half performance has defied the recession but it has been boosted by factors that may not repeat or may even reverse: incremental earnings from acquisitions, record low interest rates, a pay freeze and better weather.

"We remain cautious about the outlook for the UK economy and we expect our second half to be significantly tougher than the first. Starting with VAT rising by 2.5% on 1 January 2010, taxes and interest rates must rise and the economic climate is likely to remain challenging for some considerable time."

Enterprise Inns share price was down just over 3% to 114.25p and Young & Co's value slipped over 1% to 502.75p.

Fuller Smith and Turner's shares enjoyed an increase of over 5% to 513p.

Pub industry set for tough 2010

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